By Trevor Shackelford February 6, 2006 – Eastman Kodak Company (NYSE: EK) announced their fourth quarter and fiscal 2005 results last week. Total revenue for Kodak’s fourth quarter was $4.197 billion, 12% higher than the $3.759 billion reported for the fourth quarter of 2004. Digital revenue was $2.674 billion, 45% higher than the $1.850 billion reported for the same period in 2004. Traditional revenue was $1.514 billion, down 21% than the $1.905 billion reported for the same period in 2004. Digital sales reached 54% of total revenue in 2005, exceeding sales from film, paper and other chemical-based businesses for the first time. The GAAP net loss for the quarter was $52 million, or $0.18 per share, compared with a GAAP loss of $59 million, or $0.20 per share, in the year-ago period. Total revenue for Kodak’s full year 2005 was $14.268 billion, up 6% from $13.517 billion reported for the fiscal 2004. Net loss for the fiscal 2005 was $1.371 billion, or $4.76 per share, compared with net earnings of $556 million, or $1.94 per share reported in the fiscal 2004, largely stemming from a $1.1 billion in non-cash charges during 2005 to record a valuation allowance against the net deferred tax assets in the U.S. Contents of this Summary * Quarter Highlights * Segment Performance * Guidance * Raine Radar * Q & A Quarter Highlights • Digital earnings were $161 million, and were favorably impacted by a year-over-year increase in royalty income and favorable impact resulting from the company’s Graphic Communications Group acquisition program. • Unfavorable foreign exchange reduced fourth quarter sales by $63 million, or 1.7%. • Newly acquired KPG and Creo contributed approximately $529 million, or approximately 13.5% of fourth quarter sales. • Gross profit was 22.8% for the quarter, down from 25.9%, primarily due to increased restructuring and several accounting changes. • SG&A expenses were $748 million for the quarter, up from $710 million, reflecting costs related to acquisitions, partially offset by cost reduction activities. • During the fourth quarter, the company implemented cost reduction actions resulting in pre-tax charges totaling $311 million. • Net cash provided by operating activities from continuing operations for the fourth quarter was $1.240 billion, compared to $702 million reported in the year-ago quarter. • During the fourth quarter, debt decreased $35 million from the third quarter level, to $3.528 billion. In 2005, debt increased $1.207 billion, reflecting more than $1.5 billion relating to acquisitions, partially offset by $300 million in scheduled debt repayments. • At the end of the fourth quarter, the company had $1.665 billion in cash, compared to $610 million at the end of third quarter and $1.255 billion reported at the end of fiscal 2004. • Loss from discontinuing operations for the fourth quarter was $143 million, or $0.50 per diluted share. Segment Performance Digital and Film Imaging Systems Segment Kodak reported revenues for the segment were of $2.513 billion for the quarter, down 3% from $2.591 billion reported for the same period in 2004. Of which, digital product sales were $1.377 billion, compared to $1.006 billion, representing an increase of $371 million or 37%, primarily driven by consumer digital capture and home printing products as well as the kiosk/media business. Traditional product sales were $1.136 billion, compared to $1.585 billion, represents a decrease of $449 million or 28%, primarily driven by declines in the consumer output and film capture lines of business. Earnings from operations for the segment were $76 million, compared with $135 million reported a year ago, represents a decrease of $59 million, or 44%. Graphic Communications Segment Revenues for the segment of $942 million, up 141% from $391 million reported for the same period in 2004. Digital product sales were $792 million, up 144% from the year-ago quarter primarily related to the acquisitions of KPG and Creo. Traditional product sales were $150 million, up 124% from the same period in 2004, primarily related to the acquisition of KPG. Earnings for the segment were $40 million, compared to losses of $15 million reported for the same period in 2004. Health Group Segment Kodak’s reported revenues for the segment were $700 million, down 6% from $741 million reported for the same period in 2004. Digital product sales were $477 million, compared to $490 million reported for the same period in 2004, representing a 3% decrease driven from weaker volume and pricing in the digital output business. Traditional product sales were $223 million, down 11% from $251 million reported in the same period last year, primarily driven by volume and price declines in the film capture and output businesses. Earnings from operations for the segment were $83 million, down 27% from $113 million reported for the same period in 2004, primarily reflecting the impact of lower gross profit margins. Other Revenues for the segment were $42 million, up 17% from $36 million reported for the same period in 2004. The loss from operations for the segment was $43 million, an increase in earnings of $29 million or 40% as compared with loss from operations of $72 million reported in the fourth quarter of 2004. The increase came primarily from portfolio rationalization and an increase in earnings from Kodak’s sensor business. Guidance Kodak expects 2006 digital revenue growth between 16% and 22% with total revenue growth between negative 2% and a positive 4%. The company also expects to increase digital earnings to a range of $350 million to $450 million, with total earnings from operations of a negative $900 million to $1.1 billion. The loss from operations is largely being driven by ongoing restructuring actions. Raine Radar Despite gaining ground in its digital business, projections for the company are extremely weak. From all outward appearances, the migration to digital from film will continue to be problematic for the company for the next year. The company isn’t without solid products in their portfolio, including good performance from the graphic communications segment, but they’re losing ground as fast as they can gain it. Q & A 1. The company said that partnerships will be critical to succeed in this market. 2. Kodak believes that as long as people continue to print, then its consumer business will deliver numbers. The company is also hoping from improved growth in digital cameras. 3. The company hopes that it will gain approximately $100 million of revenue synergy from product rationalization and sales force integration. 4. Kodak said they underestimated the digital product sales in the beginning of the last year, but realized its mistake in the later part of the year. Now, the company believes that China will begin driving digital growth as they move to a digital platform. 5. Kodak believes improvements to its digital supply chain made during the last year will help its operations during the 2006. 6. The company is expecting fewer effects from seasonality during 2006, but is forecasting a slow first quarter. 7. Kodak believes its commercial graphics group will be able to produce profit margins in the range of 8% to 12%, which it believes is in line with industry expectations. 8. The company is planning to continue to invest and reorganize to continue to make sure that its digital business stays on track. 9. The company said that its health segment had a bad year and it will try to recover this year through increased investment. The company said that, despite overall softness, in areas such as X-Ray and radiology, the company is extremely strong. 10. Kodak said that if single-use camera volumes continue to fall and the company doesn’t have sufficient volumes to run operations, it will have to close its 2 single-use camera facilities. Moving the operations offshore doesn’t make sense since most of the volume in single-use cameras comes from the US. 11. Kiosks contributed approximately 2.5 to 3 times the revenue coming from media. 12. The company said its film business would last for the next two years and not undergo any significant changes to the business model.